Chinese Economic Reform (4177 words) Essay

Chinese Economic Reform
years after the death of Mao Zedong in 1976, it became apparent to many of
China’s leaders that economic reform was necessary. During his tenure as China’s
premier, Mao had encouraged social movements such as the Great Leap Forward and
the Cultural Revolution which had had as their bases ideologies such as serving
the people and maintaining the class struggle. By 1978 “Chinese leaders
were searching for a solution to serious economic problems produced by Hua
Guofeng, the man who had succeeded Mao Zedong as CCP leader after Mao’s
death” (Shirk 35). Hua had demonstrated a desire to continue the
ideologically based movements of Mao. Unfortunately, these movements had left
China in a state where “agriculture was stagnant, industrial production was
low, and the people’s living standards had not increased in twenty years”
(Nathan 200). This last area was particularly troubling. While “the gross
output value of industry and agriculture increased by 810 percent and national
income grew by 420 percent [between 1952 and 1980] … average individual income
increased by only 100 percent” (Ma Hong quoted in Shirk 28). However,
attempts at economic reform in China were introduced not only due to some kind
of generosity on the part of the Chinese Communist Party to increase the
populace’s living standards. It had become clear to members of the CCP that
economic reform would fulfill a political purpose as well since the party felt,
properly it would seem, that it had suffered a loss of support. As Susan L.

Shirk describes the situation in The Political Logic of Economic Reform in
China, restoring the CCP’s prestige required improving economic performance and
raising living standards. The traumatic experience of the Cultural Revolution
had eroded popular trust in the moral and political virtue of the CCP. The
party’s leaders decided to shift the base of party legitimacy from virtue to
competence, and to do that they had to demonstrate that they could deliver the
goods. (23) This movement “from virtue to competence” seemed to mark a
serious departure from orthodox Chinese political theory. Confucius himself had
posited in the fifth century BCE that those individuals who best demonstrated
what he referred to as moral force should lead the nation. Using this principle
as a guide, China had for centuries attempted to choose at least its
bureaucratic leaders by administering a test to determine their moral force.

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After the Communist takeover of the country, Mao continued this emphasis on
moral force by demanding that Chinese citizens demonstrate what he referred to
as “correct consciousness.” This correct consciousness could be
exhibited, Mao believed, by the way people lived. Needless to say, that which
constituted correct consciousness was often determined and assessed by Mao.

Nevertheless, the ideal of moral force was still a potent one in China even
after the Communist takeover. It is noteworthy that Shirk feels that the Chinese
Communist Party leaders saw economic reform as a way to regain their and their
party’s moral virtue even after Mao’s death. Thus, paradoxically, by
demonstrating their expertise in a more practical area of competence, the
leaders of the CCP felt they could demonstrate how they were serving the people.

To be sure, the move toward economic reform came about as a result of a
“changed domestic and international environment, which altered the
leadership’s perception of the factors that affect China’s national security and
social stability” (Xu 247). But Shirk feels that, in those pre-Tienenmen
days, such a move came about also as a result of an attempt by CCP leaders to
demonstrate, in a more practical and thus less obviously ideological manner than
Mao had done, their moral force. This is not to say that the idea of economic
reform was embraced enthusiastically by all members of the leadership of the
Chinese Communist Party in 1978. To a great extent, the issue of economic reform
became politicized as the issue was used as a means by Deng Xiaoping to attain
the leadership of the Chinese Communist Party. Mao’s successor, Hua Guofeng, had
“tried to prove himself a worthy successor to Mao by draping himself in the
mantle of Maoist tradition. His approach to economic development was orthodox
Maoism with an up-to-date, international twist” (Shirk 35). This approach
was tied heavily to the development of China’s oil reserves. “[W]hen [in
1978] estimates of the oil reserves were revised downward[,] commitments to
import plants and expand heavy industry could not be sustained” (Shirk 35).

Deng took advantage of this economic crisis to discredit Hua and aim for
leadership of the party. “Reform policies became Deng’s platform against
Hua for post-Mao leadership” (Shirk 36). Given this history of economic
reform, it is evident that “under the present system economic questions are
necessarily political questions” (Dorn 43). Once Deng and his faction had
prevailed, it was necessary for some sort of economic reform to evolve. The
initial form the new economy took was not a radical one. China was “still a
state in which the central government retain[ed] the dominant power in economic
resource allocation and responsible local officials work[ed] for the interest of
the units under their control” (Solinger 103). However, as time passed,
some basic aspects of the old system were altered either by design or via the
process of what might be called benign neglect. As Shirk points out, in rural
areas, decollectivization was occurring: “decision making power [was being
transferred] from collective production units (communes, brigades, and teams) to
the family” (38); purchase prices for major farm products were increased
(39). In 1985, further reforms were introduced. For example, long-term sales
contracts between farmers and the government were established. In addition, in
an effort to allow the market to determine prices, “city prices of fruit
and vegetables, fish, meat, and eggs, were freed from government controls so
they could respond to market demand” (Shirk 39). Most importantly, “a
surge of private and collective industry and commerce in the countryside”
(Shirk 39) occurred. This allowed a great percentage of the populace to become
involved in private enterprise and investment in family or group ventures. The
conditions also allowed rural Chinese to leave the villages and become involved
in industry in urban centers (Shirk 40). The economy grew so quickly that
inflation occurred and the government had to reinstitute price controls. China’s
economy retains these characteristics of potential for growth–and inflation–to
this day. Another important aspect of Chinese economic reform was the decision
of China to join the world economy. Deng Xiaoping and his allies hoped to effect
this 1979 resolution in two ways: by expanding foreign trade, and by encouraging
foreign companies to invest in Chinese enterprises. This policy–denoted the
“Open Policy” (Shirk 47)–was a drastic removal from the policies of
Mao Zedong and, in fact, from centuries of Chinese political culture. The Open
Policy, which designated limited areas in China “as places with
preferential conditions for foreign investment and bases for the development of
exports” (Nathan 99), was extremely successful in the areas where it was
implemented (Shirk 47). However, it was looked upon by many Chinese as nothing
less than an avenue to “economic dependency” (Nathan 50). Indeed, when
the policy was first implemented, many Chinese seem[ed] to fear that Deng’s
policies [were] drawing China back toward its former semi-colonial status as a
“market where the imperialist countries dump their goods, a raw material
base, a repair and assembly workshop, and an investment center.” (Nathan
51) It is interesting to note the symptoms of a national character that would
subscribe to the above sentiment. In an article written in 1981, just two years
after the Open Policy was first proposed, Andrew J. Nathan noted the almost
pathological resistance to foreign intervention in the Chinese economy:
“Some Chinese fear that reliance on imported technology will encourage a
dependent psychology … [Many] Chinese perceive joint ventures as a costly form
of acquisition. ‘Some people worry: Won’t we be suffering losses by letting
foreigners make profits in our country?'” (52). The Chinese were as
vociferous about issues of sovereignty. Nathan maintained that the Mao-led
revolution, which culminated in victory in 1949, had been fueled by “an
intense patriotism: … once China had ‘stood up,’ no infringement on its
sovereignty, no matter how small, should be permitted” (53). These feelings
were manifested in denying foreign businessmen long-term, multiple entry visas,
resisting “increased foreign economic contacts” and alteration of
current ways of doing things, and disinclination to become involved in
government-to-government loans and joint ventures lest Chinese become exploited
in some way (Nathan 53-55). Given these hesitancies on the part of the Chinese
society vis-a-vis foreign relations, it is impressive that Deng and his allies
were able initially to create and implement the Open Policy since many members
of the society at large were resistant to becoming involved in a policy so
antithetical to the Chinese national character. However, once the successes of
the Open Policy were apparent, resistance to the plan by the populace waned.

Moreover, given the confluence of politics and economics in China, it seems
apparent that some members of the CCP would also not be in favor of the plan.

Nevertheless, the Open Policy was implemented and has become instrumental in the
success of the burgeoning Chinese economy. The implementation of the Open Policy
was so successful that by 1988 the leaders of the CCP were encouraged to create
a new program called the “coastal development strategy.” In this
program, even more of the country was opened up to foreign investment–an area
which, at the time, included nearly 200 million people. Moreover, by involving
more overseas investors, “importing both capital and raw materials,”
and “exporting China’s cheap excess labor power,” the new policy was
one of “‘export-led growth’ or ‘export-oriented industrialization.’ It
[was] explicitly modeled on the experiences of Taiwan and the other Asian ‘small
dragons'” (Nathan 99). One analyst has maintained that “China now
stands at the threshold of the greatest opportunity in human history: a new
economic era promising greater wealth and achievement than any previous
epoch” (Gilder 369). Illustrative of this optimistic feeling is Shanghai,
an area that was designated for preferential conditions for foreign investment
and as a base for the development of exports in 1988. This city and environs in
the Yangtze Delta area have a population of approximately 400 million people and
the city has become the nation’s financial hub for international and national
investors. For political reasons, this area was excluded from the original Open
Policy designation in 1978, but is currently in the process of catching up with
other areas so designated. Indeed, the increase in foreign investments in the
last two years is striking. The area received 3.3 billion dollars in foreign
investments during the 1980s. The area received the same amount from foreign
investments in 1992 alone. In only the first ten months of 1993, the area had
received over six billion dollars worth of foreign investments (Tyler A8).

Western analysts have asserted that the Open Policy and the coastal development
strategy have allowed Deng to entrench his political power (Shirk 47) and will
allow his power to be sustained even after death. If this is true, Deng should
be very popular in Shanghai. With its new designation, and with the billions of
foreign dollars coming into the area, it has become necessary to improve the
city’s facilities. To that end forty billion dollars worth of public works
projects have been allocated by the central government for Shanghai within the
last year (Tyler A1). These public works projects include new sewers, a new
water system, new gas lines, a new bridge, and extensive roadwork. Future plans
include the construction of a second international airport, a container port, a
new subway system, and more roads and bridges (Tyler A8). The financial
district, which will feature a new stock exchange, is also being rebuilt by
China and foreign investors in a joint venture. By being designated for
preferential conditions, Shanghai received from the central government tax
exemptions for enterprises doing business with foreign companies, tax holidays
for new factories set up with foreign investments, and a bonded zone–the
largest in China–for duty free imports of raw materials. Shanghai now has all
the trappings of a modern city: discos, construction projects, and conspicuous
consumption. In short, where “revered monuments and golden arches exist
side by side” (Riboud 12), the appearance of the new Shanghai does nothing
less than signal “the end of the ideological debate over China’s free
market experiments” (Tyler A8). Shanghai has joined the ranks of the modern
metropolis. However, this is not necessarily a beneficial development. Inflation
is rampant: prices have doubled in the industrial zones in the last five years.

Nevertheless, the fact that Shanghai currently possesses the fifth most
expensive office space in the world demonstrates that demand is high and that
the prospects for future growth are promising (Tyler A8). Indeed, Pudong, a free
export manufacturing zone described as “the future sight of Shanghai’s
Manhattan” (Tyler A8), boasts more than twenty factories built or being
built with names like Siemens and Hitachi prominent. This area has become
particularly attractive to foreign investors and companies because of its tax
concessions, duty free imports of raw materials, and cheap labor. Shanghai
stands to benefit, too, as it receives ancillary technology and discretionary
spending from the workers and executives of the companies represented (Tyler
A8). It is conditions like these that have caused at least one analyst to
predict that China will be “the richest economy in the world within the
next 25 years” (Gilder 372). Shanghai is by no means unique to this growth.

Additional foreign investments have continued to pour into other areas of China.

For example, the Boeing Company recently announced its intention to “invest
$100 million in a plant in [Xian] China to make tail sections for 737
jetliners” (“Boeing” D4). In addition, E.I. du Pont recently
predicted “that its investments and business in China could increase as
much as ten times by the end of the century” (“Du Pont” D2).

Tellingly, du Pont’s chairman attributed the company’s negotiations of “as
many as 28 new projects in China” to the fact “that the country’s
financial changes, improved infrastructure and rising disposable income has
[sic] encouraged the company to expand its business activities” (“Du
Pont” D2). The Chinese government has made conscientious attempts to
promote the strength of the country’s economy while protecting its citizens.

Just a few weeks ago, the government instituted “tight-money policies,
intended to control inflation and slow what has been the world’s fastest growing
major economy” (Shenon “China Halts” D1). However, after doing
so, China’s Securities Regulatory Commission was forced to stop the issuing of
new issues on the Shanghai and Shenzhen Stock Exchanges because the value of the
markets had decreased so greatly. This latter move was “meant to calm
millions of first-time Chinese investors who evidently went into the market
believing that stock prices could only go up” (Shenon “China
Halts” D1). Might this policy show a union of economic and moral concern?
If so, it demonstrates the desire on the part of the government to show some
kind of responsibility, some moral force, to its citizenry. At the very least,
the strategy appears to show a practical desire on the part of the government to
take control over what could have been a bad economic situation. Indeed, after
these measures were instituted, China’s trade deficit decreased (Hansell D2) and
the stock markets’ volume attained record highs (“Stocks Surge” D2).

To be sure, Chinese investors remain somewhat wary about the stock market and,
ironically enough, more control of the stock markets appears to be necessary (Shenon
“A Nail-Biting” D1). But, in discussing Chinese attempts to control
inflation, Philip J. Suttle, head of emerging markets research at the investment
firm of J.P. Morgan, has predicted that “[i]t looks as though the Chinese
are going to have the soft landing they are aiming for” (quoted in Hansell
D2). China’s interest in stock markets is no longer restricted to within its own
boundaries. This month, Shandong Huaneng Power Development Company, “the
first mainland Chinese company to have its primary listing on the New York Stock
Exchange” (“China Stock” D5), began trading shares. The stock
should be an attractive one to investors: Chinese electrical “demand … is
expected to grow by a whopping 17 million kilowatts a year until the turn of the
century” (Zuckerman D6). Moreover, China stands to gain from the issue’s
sales. “The company plans to use the $311 million dollars it received from
the offering to retire $83 million in loans from … Chinese state entities. It
also plans to expand its overall generating capacity” (Zuckerman D6). Nor
does this signify the only Chinese attempt of raising capital from foreign
sources on foreign soil. “Three more power companies are expected to be
listed in New York and Hong Kong in the coming months” (Zuckerman D6).

Given the apparent strength of the Chinese economy as shown by huge public works
projects, extensive foreign investments, participation in the world economy, and
a generally higher standard of living by the populace, it would appear that
China is now ready to join the world as a modern capitalistic and democratic
society. However, this is not quite the case. The CCP retains vestiges of those
characteristics of insularity and intransigence as discussed by Nathan. Because
of its human rights record, the country’s economic growth is being impeded. That
is, the politics of China, which have always been allied with its economics, are
now restricting international growth. The United States, especially, has been
concerned with China’s treatment of political dissidents. In May, President
Clinton decided to end linking China’s trade status with the United States with
its record on human rights. The president has been criticized for this because
of situations like the following: trials for “‘counterrevolutionary
activities’ [including] … plans to use a remote-controlled airplane to drop
pro-democracy leaflets over … Tienenmen Square” (“China cracks”
A13) have recently begun for fifteen dissidents and labor organizers who were
involved in the Tienenmen Square protests. These trials have “been delayed
twice, first to avoid negative international reaction just before the decision
last September on China’s failed bid to host the 2000 Olympics and then this
spring to avoid influencing Clinton’s trade decision” (“China
cracks” A13). In addition, China has instituted “new laws effective in
June [which] give sweeping powers to China’s State Security Bureau to clamp down
on dissidents” (“China cracks” A13). China is fully aware of
United States’ concerns about its human rights record. Given the fact that the
United States has made it clear to China that that record will be allied with
trade status, China’s timing of such restrictive activities has caused United
States legislators and administrators to question China’s sincerity in its
desire to have a favored trade status with the United States. Indeed, just in
the past few days, it took a last-minute lobbying campaign by President Clinton
and his Cabinet [to head off a] potentially embarrassing vote by the House of
Representatives to restrict trade with China as a way to punish Beijing for
reported human rights violations. (Bradsher A7) But China’s problems in joining
the community of the world market have more to do than with its political ethos
and practices. China appears not to understand or to be able to follow through
on fundamental modern economic practices. For example, the United States has
recently complained that “China has not complied with international rules
on access to its markets and protection of copyrights and patents” (Gargan
14). Such non-compliance could make it difficult for China to become a founding
member of the World Trade Organization, the successor to the General Agreement
on Tariffs and Trade and the body that is intended to promote global free trade
by lowering tariffs and other barriers, [which] will be formally constituted on
January 1, 1994. (Gargan 14) The specific nature of the United States’ complaint
has to do with China’s pirating of musical compact disks, video laser disks and
computer software. In fact, it is estimated that such pirating costs American
companies a billion dollars a year. This phenomenon seems to have to do with the
Chinese psychology as described by Nathan. In his 1981 essay he noted that China
did not wish to become a “technological client of the west. The preferred
solution is to buy one item and copy it” (Nathan 52). Clearly, this is not
the way trade works today. It is the United States’ position that China must
adhere to the rules of trade before it can be included in a trade organization.

Needless to say, exclusion from WTO would be disastrous for any country, but
particularly for an emerging market such as China. Even on a day to day basis,
China’s economic leaders seem unable to understand how some aspects of a market
economy work. In discussing the status of the Shanghai Stock Market, for
example, one stock dealer referred to it as “crazy” (“Stocks
Surge” D2). Moreover, American analysts have been amazed to discover in the
Shanghai market “the lack of regulation and the poor disclosure
requirements. Some companies have been listed for two or three years and have
not issued an annual report” (Hansell D2). It is no wonder that Chinese
investors become anxious about their investments. The issuance of shares in the
Shandong Huaneng Power Development Company also demonstrates the lack of
expertise on the part of the Chinese in the modern world market. In fact,
according to one Hong Kong investment analyst, “‘[t]he company wasn’t
really a company. It was just a bunch of discrete plants that they tied a bow
around and wrote a prospectus on'” (Zuckerman D6). The prospectus
guaranteed a fifteen percent annual return on investments. In fact, the return
will no doubt be less than that because of prevailing currency exchange rates
and debt that the company will have to assume. To be sure, the problems of the
Shandong Huaneng Power Development Company and the Shanghai Stock Exchange may
demonstrate only the problems of an immature economy. Nevertheless, if China
wishes to become a viable member of the world economic community, such
shortcomings will have to be eliminated quickly. These apparent problems may
also be the result of an economic system that is run by the state. Certainly,
one thing that the CCP has attempted to do is create a market economy while
retaining a state controlled system. This structure may be possible but it does
have its critics. Steven N.S. Cheung, in an essay written in 1989, argued for
the “creation of private property by mandate” (31), feeling that
privatization in China would lead to necessary additional investment in the
society’s infrastructure and the establishment of a “judicial system that
is based firmly on the principle of equality before the law” (Cheung 32).

Echoing Cheung’s sentiments, James Dorn saw problems in the areas of Chinese
banking and finance. In this arrangement, Dorn argued, “the state controls
the bulk of investment resources. The lack of a private capital market has
handicapped economic development in China and hampered rational investment
decisionmaking” (43). In order to become a modern economic state Dorn
argued for the necessity of circumventing “China’s ruling elite who oppose
the dismantling of state monopolies and who benefit from price fixing and
nonprice rationing” (51). Xu Zhiming also saw the necessity for a revamping
of the Chinese system: “We must throw off the traditional system
completely” (249) in order for economic reform to thrive. Communist Party
members, of course, articulate a different position. In a recent interview that
appeared in the Beijing Review, Feng Bing, Deputy Secretary General of the State
Commission for Restructuring the Economic System, spoke to the issue of economic
reform in China. It is striking that Feng spoke of the benefits that the
populace has received as a result of the economic reform now occurring in China.

That is, his comments appeared to demonstrate the beneficence, or the moral
force, of the Chinese Communist Party vis-a-vis economic reform. He noted that
such reform involves the essence of socialism: “to liberate and develop
productive forces; to eradicate exploitation; to remove polarization; and … to
attain the goal of common prosperity” (“Official” 12). Thus, CCP
leaders still appear to see their roles as representatives of a moral force. CCP
members and leaders wish economic reform not to be judged on just its practical
merits, but also as an effect of the moral force of the leadership. Economic
reform, then, becomes nothing less than a moral crusade and it is thus easy to
see why, for example, China “has staked its national prestige on becoming a
founding member of the World Trade Organization” (Gargan 14). Will China
succeed in taking its place among the nations of the world market? Will the CCP
succeed in retaining its political power given the drastic changes in the
societal makeup of China that are occurring due to the changing economic
realities? I would suggest that the chances are better for the former than for
the latter. Once the Chinese attain more sophistication relative to
international and national markets, institute a more manageable banking system,
and make a good faith effort to insure acceptable human rights, the country may
well become “the richest economy in the world within the next 25
years” (Gilder 372). However, whether or not these conditions can occur
without a weakening of the state controlled system is problematic. The most
impressive and far-reaching display of moral force by the CCP may well have to
be a voluntary reduction of its power over the people. Paradoxically, by
weakening itself politically, the party may demonstrate its true moral force by
liberating, politically and economically, one billion Chinese citizens.

“Boeing Planning to Invest $100 Million for China Plant.” New York
Times: 9 August 1994, D4. Bradsher, Keith. “Bill to Restrict China’s
Imports Loses in House.” New York Times: 10 August 1994, A7. Cheung, Steven
N.S. “Privatization vs. Special Interests: The Experience of China’s
Economic Reforms.” Economic Reform in China: Problems and Prospects. Ed.

James A. Dorn and Wang Xi. Chicago: University of Chicago Press, 1990. 21-32.

“China cracks down on dissent after trade threat lifted, report says.”
Hartford Courant: 29 July 1994, A13. “China Stock Is Most Active.” New
York Times: 5 August 1994, D5. Dorn, James A. “Pricing and Property: The
Chinese Puzzle.” Economic Reform in China: Problems and Prospects. Ed.

James A. Dorn and Wang Xi. Chicago: University of Chicago Press, 1990. 39-61.

“Du Pont Plans Increase In Chinese Investment.” New York Times: 10
August 1994, D2. Gargan, Edward A. “U.S. May Thwart China’s Trade
Goal.” New York Times: 24 July 1994, 14. Gilder, George. “Let a
Billion Flowers Bloom.” Economic


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